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U.S. Government Bonds Strengthen Ahead of Fed Minutes

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02/21/2018 | 05:39pm CEST

By Akane Otani

U.S. government bond prices edged higher Wednesday ahead of the release of minutes from the Federal Reserve's January policy meeting.

The yield on the benchmark 10-year U.S. Treasury note was recently at 2.888%, according to Tradeweb, compared with 2.895% Tuesday.

Bond yields, which rise as prices fall, have climbed to multiyear highs this month, lifted by signs that long-dormant inflation could be picking up and by concerns that larger budget deficits could increase the supply of government bonds in the market at a time when the Fed is tapering its bond purchases.

The selling sent the yield on the 10-year Treasury note, which affects everything from mortgage rates to credit cards, past 2.91% on Feb. 14 -- its highest level since January 2014. Inflation is a threat to the bond market since it chips away at the purchasing power of bonds' fixed interest payments.

Yet as global stocks have stabilized, recouping their losses from their rout earlier in the month, selling in the bond market has generally eased.

Skepticism over how quickly inflation is picking up -- and questions over whether data showing a pickup in wages and consumer prices was an anomaly, rather than a broad trend -- could help cap a further rise in yields, investors say.

"It felt like it was overdone," Greg Peters, managing director and senior investment officer at PGIM Fixed Income, said of the recent selling in Treasurys. "Inflation is stabilizing here, but it's not at a tremendous takeoff point like some people are predicting."

Later Wednesday, investors will be parsing minutes from the Fed's latest policy meeting.

The minutes could show whether officials are rethinking their plan to raise short-term interest rates three times this year, especially if it appears that inflation could break through the central bank's 2% target.

So far, federal-funds futures, used by traders to place bets on the course of interest rates, point to a 28% chance the Fed raises rates at least four times this year -- up from 24% one week ago, according to CME Group.

Write to Akane Otani at akane.otani@wsj.com

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